Mises Wire

Drink and Be Merry: Styrofoam, Paper, and Prices

As I argued in my last Forbes article, most of our expressions of conscience have more to do with signaling to others like us that we are righteous than they have to do with fixing problems. Things we do to Save the Earth are shining examples; to paraphrase Thomas Sowell, most kinds of “going green” are about showing that we are on the side of the angels rather than actually improving environmental quality.

The discussion illustrates a much broader point, though. As I argue in my paper “Economic Calculation in the Environmentalist Commonwealth” and an accompanying article (my first Forbes.com contribution, for what it’s worth), economic accounting is necessary for moral or environmental accounting. Why is this? Without prices, we can’t know precisely what we’re giving up in order to do something. Therefore, we can’t know whether (for example) Styrofoam cups or paper cups are better. When private property rights are secure and when interventions don’t distort the market outcome, all of the relevant costs and benefits will be reflected in the prices of the cups. If the Styrofoam cup from which I’m currently drinking is in fact wasteful relative to a paper cup and cardboard sleeve even though the price suggests otherwise, we have to search for areas in which private property rights are not secure or other sources of distortion. For all of my objections, President Obama scored a point with me during the State of the Union Address when he suggested getting rid of oil subsidies.

Profits and losses are also essential sources of the knowledge we need if we are to decide whether we have chosen wisely or not. Profits and losses measure the value of what has been produced net of the value of what had to be foregone in order to produce it. A firm earns profits when it uses resources to produce something that is of greater value than anything else that those resources could have been used to produce. A firm earns losses when it uses resources to produce something that is of lower value than anything else those resources could have been used to produce.

It is important to note that prices and profits are not normative guidelines in any cosmic sense. There is nothing in economics that says you should devote all of your time and energy to the activities that generate the highest profit as measured in money. Prices, profits, and losses do, however, make the opportunity costs of our actions very explicit. If we know the going wage–the price of our labor, for example–we can know what we’re giving up by spending time sorting our garbage. If we know how profitable different enterprises are, we can know what we’re giving up when we give our money away.

With that in mind, I’ve written in defense of disposable diapers. Recently, we’ve switched from disposable to reusable diapers for home use after deciding that after taking everything into consideration, the reusable diapers were the best choice for our family. I don’t worry about landfills being filled with petroleum products, however, in part because of Mike Munger’s hypothesis that someday, people will be strip-mining old landfills in order to refine discarded plastics into fuel. Here’s the EconTalk podcast in which he talks about it. While I’m putting up links, here are links to resources from my “Environmental and Resource Economics” lecture at Mises U 2009, here’s the talk itself, and here are other talks of the same name from other Mises Us by Timothy Terrell, Walter Block, and George Reisman.

Economics as such doesn’t prescribe a particular course of action. However, no matter what our values are, we can’t make wise choices if we don’t know our options. That’s where prices, profits, and losses are essential.

Updated 2/9/2011: A commenter took issue with my claim that Styrofoam is easier to recycle than paper cups. I’ve changed the text above to provide my source, which was a few notes on a conversation with a coffee shop owner who says that they recycle a lot of their Styrofoam cups and that a lot of their customers bring back their used cups for recycling. Note, though, that the same source points out that the coffee shop has to spend a lot of time and energy washing reusable cups that they use for eat-in business. This might actually be worse: after all, ceramics require a lot of energy and materials to manufacture, and they require a lot of energy to wash. The point, though, is that prices, profits, and losses are reliable guides to action.